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Eurand N.V. (NASDAQ:EURX)

Q1 2009 Earnings Call

May 7, 2009; 8:30 am ET

Executives

Gearoid Faherty - Chairman & Chief Executive Officer

Mario Crovetto - Chief Financial Officer

Bill Newbould - Vice President of Investor Relations

Analysts

Rich Silver - Barclays Capital

David Steinberg - Deutsche Bank

Frank Pinkerton - SunTrust Bank

Operator

Greetings and welcome to the Eurand first quarter 2009 financial results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Bill Newbould, Vice President, Investor Relations at Eurand. Thank you Mr. Newbould, you may now begin.

Bill Newbould

Thank you and good morning everyone. Joining us on the call today are Gearoid Faherty, Chairman and Chief Executive Officer and Mario Crovetto, Chief Financial Officer. Before we begin I’d like to remind everybody that this conference call may contain forward-looking statements within the meaning of the Federal Securities Laws.

These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements.

Factors that could cause our actual results and outcomes to differ materially from those expressed in or implied by such forward-looking statements are discussed in greater detail in our annual report on Form 20-F filed with the SEC in March 2009, as well as in subsequent filings.

Given that forward-looking statements are subject to risks and uncertainties, you should not place undue reliance on them. Forward-looking statements are based on various assumptions and represent our estimates and assumptions only as of the date they are made. We assume no obligation to update forward-looking statements.

With that I’d like to now turn the call over to Gearoid.

Gearoid Faherty

Thanks Bill and good morning everyone. As you will have seen in our press release this morning, we’re off to an excellent starting in 2009. We had another strong quarter with revenues of EUR 29.2 million or $38.7 million, a very impressive growth rate of 17% from the first quarter of 2008. I believe our ability to grow in the current downturn, speaks to the underlying strength and diversity of our business.

Driving our revenue growth in addition to high royalties from sales of AMRIX by Cephalon, were sales of Eurand’s pancreatic enzyme product PANCRELIPASE. We are thrilled with the rapid market uptake of this low cost product. In just over three months, PANCRELIPASE has captured a 16% share of the total quotas pancreatic enzyme markets and is now the second most prescribed product in the class, according to IMS Health.

In the past, Impax Laboratories distributed this product under the trade name [Lycrome]. In 2008 we changed distributor and now distribute the product with X-GEN Pharmaceuticals under the trade name PANCRELIPASE. At that time, we anticipated the potential exit from the market, of other low cost products and we made a conscious decision to maintain our product in the market to ensure patient access to these products, while we waited for approval of our new product.

I’m delighted to say that this decision has also allowed us to capitalize on the changing market dynamics for pancreatic enzyme products. At the end of 2008, KV’s [Panjestom] held 36.8% share of total prescriptions in the coated pancreatic enzyme market. Since their withdrawal, we’ve seen weekly decline in KV’s share and today they have lost 29 share points.

PANCRELIPASE on the other hand has gained 14 share points in the same period and now has a 16.1% share, making it the second most prescribed coated pancreatic enzyme product. We estimate that for every two scripts KV has lost, we’ve gained one and we expect that PANCRELIPASE will continue to gain share, as the remaining stock of the low cost competing products is sold off and their 7.5% share declines to zero.

This strategy has the benefit of ensuring patient access to pancreatic enzyme products in the first few months of launch until 1008 is reimbursed by Medicare and Medicaid. The remainder of 2009 is certain to be a busy and exciting time for Eurand, as we continue to anticipate a response from the FDA regarding approval of our pancreatic enzyme product EUR-1008 late in the second quarter.

Recently, the FDA notified us that they had approved the trade name ZENPEP for 1008. At the agencies request, we had submitted ZENPEP as an alternative to Zentase, which they determined was too similar to the other GI drug names such as Zantac. Having the new name in place, at least provisionally pending final product approval, allows us to begin to update and prepare marketing materials in advance of the launch.

Moving away from ZENPEP, during the first quarter we also announced three new commercialization license and supply agreements with leading pharmaceutical companies in Turkey, Israel and South Africa for our once-a-day formulation of the muscle relaxant cyclobenzaprine. In 2008, we entered into a similar agreement for the South Korean market, where I’m pleased to say the product was approved last week. We are continuing to look for additional partners for cyclobenzaprine in other countries throughout the world.

In the U.S., cyclobenzaprine extended release is marketed by Cephalon as AMRIX. Cephalon sales of AMRIX were $26.2 million in the first quarter of 2009, up 169% from a year ago, which was the first full quarter of sales following commercial launch in November 2007. Scripts are now running at around 10,000 per week.

As you know, Cephalon is providing strong sales and marketing support for this product, which is now detailed by approximately 840 sales people. We are pleased by the continuing growth and sales of AMRIX, which is differentiated in the market by its ability to be inspective without much of the drowsiness commonly associated with other muscle relaxants.

I would now like to take a few minutes to update you on some recent events with regard to our clinical development activities. Patient enrollment is complete in a Phase III trial of ZENPEP, in patients with chronic pancreatitis and we expect to have the results early in the third quarter. We anticipate that the data from this trial will provide additional information about the product clinical benefits in this condition and in these patients and be supportive of our marketing efforts to gastroenterologists.

Turning to EUR-1048, our co-development product with GlaxoSmithKline; GSK continues to await a decision from the FDA on its marketing application. As many of you know, we co-developed 1048 as part of the product life cycle management strategy for GSK and GSK requests that, that we not disclose the trade name or indication until approval. Pending approval, Eurand is eligible to receive payments for regulatory and sales milestones, revenue from manufacturing 1048 for GSK and royalties on net sales.

Looking now at EUR-1025, our once-a-day proprietary formulation of the anti-emetic Zofran or ondansetron, we filed an IND with the FDA in December and recently completed enrollment in pivotal PK studies, which started earlier this year. We expect these result will form the basis of a future 505(b) 2 filing for this product.

For our other late state proprietary product, EUR-1073; the FDA recently granted orphan drug designation for pediatric ulcerative colitis for this product. Orphan drug status provides seven years of U.S. market exclusivity upon FDA approval. We licensed this product last year from Chiesi, which market is in Europe as CLIPPER, a corticosteroid intended for use in the treatment of ulcerative colitis.

Chiesi recently completed patient treatment in a Phase IIIb clinical study in Europe, comparing CLIPPER to prednisolone, the current standard of care in UC. The results were expected later in the second quarter of 2009 and will provide us with further information to the product future course of development.

Following the close of the quarter, we announced another addition to our management team, with the appointment of Dr. Robert Becker as Chief Research Officer. Robert is a 25 year veteran of the pharmaceutical industry, mostly recently directing Small Molecule Development of biogenetic. He will based in Milan and have responsibility for whole of Eurand’s research and formulation development activities worldwide.

So in summary, we had a very solid start to the year, with a strong first quarter, the success of our PANCRELIPASE product, the new distribution agreements for cyclobenzaprine, and the reg approvals for cyclobenzaprine in South Korea. We also made significant progress with our clinical development programs and we strengthened the management team.

With that I will now ask Mario to review our quarterly financial results with you and then I will make a few brief closing remarks before we take your questions. Mario.

Mario Crovetto

Thank you, Gearoid. The first quarter of 2009, was another quarter of significant revenue growth for Eurand. Comparing first quarter 2009 with first quarter 2008, revenues totaled EUR 29 million or $39 million, at the convenient rate of 1.33. This represents an increase of 17% in current currency, which means included the positive impact of exchange rate effect in this quarter. Revenue growth was 7% in constant currency.

There were two main reasons for these increasing revenues; first, as Gearoid mentioned, on a credit base, our low-cost PEP in U.S. market has been a significant product for us this quarter. Second, higher royalties from sales of AMRIX by Cephalon compared to the first quarter of 2008.

Looking at revenues by category, product sales were up 9% in constant currency, royalties were up 44% in constant currency and development fees were lower by 28% in constant currency.

As you know our development fees can fluctuate significantly from quarter-to-quarter, because success milestones are booked as revenues when development milestones are reached. The gross margin on product sales was 41%, which is inline with first quarter 2008. Keep in mind that PANCRELIPASE is a local cost product; therefore its gross margin is lower than typical margins of branded pharmaceutical product.

Research and development expenses were up 31% in constant currency, mainly because of increased clinical activity this year compared to a year ago. As you heard from Gearoid, R&D is an essential component of our continuing growth and we are committed to developing our product pipeline.

This increased clinical activity will continue during the rest of the year and there is a consequence we expect; research and development expenses to rise between 30% and 60% for the full year 2009 compared to the full year 2008. The level of quarterly and yearly spending will vary depending on the progress and timing of our values project and where they are in the development cycle.

Selling, general and administrative expenses were slightly lower compared to a year ago. We expect that SG&A will increase following the approval and launch of ZENPEP. While the last part of the commercial team is in place now, the selling component of SG&A will increase with the addition of new sales representatives upon approval, expected late in the second quarter. Like a year ago, net loss in this quarter was EUR 1 million or $1 million which is $0.03 U.S. per share.

At the end of the first quarter, we have essentially no debt and a positive cash balance of EUR 24 million or $32 million. At the end of the previous quarter, our liquidity included cash and cash equivalents and marketable securities was EUR 23 million or $30 million. Therefore liquidity was up $2million because of positive cash generation during the first quarter.

Now I will turn the call back to Gearoid.

Gearoid Faherty

Thank you, Mario. Just before we take your questions, I would like to take a moment to preview for you some upcoming milestones in what is shaping up to be a very exciting and pivotal year for Eurand. First and foremost, we look forward to the expected approval and launch of our lead product candidate ZENPEP, which has an FDA action date of late second quarter. Meanwhile, we expect to expand our shares to pancreatic enzyme market with PANCRELIPASE.

We eagerly await the expected approval and launch by GSK of 1048. We expect further growth in Cephalon’s sales of AMRIX, reflecting recent sales force expansion and continuing market awareness and exceptions. We look [Technical Difficulty] of the Phase III trial for ZENPEP in chronic pancreatitis early in the third quarter and the result later in the second quarter of Chiesi Phase IIIb study for EUR-1073 and ulcerative colitis and the result of the PK studies on 1025 in third quarter.

Lastly, we will continue to see new co-development in licensing deal with other pharmaceutical companies to expand our pipeline.

That concludes our formal remarks at this time. I will ask the operator to open the call for your questions. Operator.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from Rich Silver from Barclays Capital.

Rich Silver - Barclays Capital

Good morning.

Gearoid Faherty

Hi, Rich.

Rich Silver - Barclays Capital

Can you just talk about SG&A; you did say you expected the selling component to increase in the late second quarter, but can you give us a sense for the full year, what sort of number you are expecting as you deal with R&D?

Mario Crovetto

As far as selling expense are concerned, this will entirely depend on the timing and evolution of ZENPEP. R&D expenses, that’s a different story. As I said earlier, we are committed to develop our pipeline anyway and this is why I indicated that we expect the full year to represent an increase over the prior year, over 2008, of between 30% and 50%.

Rich Silver - Barclays Capital

Okay, and on 1025, Gearoid you mentioned that this PK study that you recently completed would form a basis of 505(b) 2 filing, what additional clinical work are you planning before filing and what would be the timetable for filing?

Gearoid Faherty

Well actually Rich, we did more than one PK study, so with PK studies and they’ve just completed. For the movement we’re not prepared to talk about any additional clinical work we might plan to do, but we’re evaluating options. So far we’ve completed PK studies and we will determine whether that’s sufficient or whether we need to do additional work once we see the results of these studies.

Rich Silver - Barclays Capital

Okay and I’m sorry when would those results be available; third quarter?

Gearoid Faherty

Third quarter we’d expect, early third quarter.

Rich Silver - Barclays Capital

Okay. Thanks very much.

Gearoid Faherty

No problem.

Operator

Thank you. Our next question is coming from David Steinberg from Deutsche Bank.

David Steinberg - Deutsche Bank

Thanks. A couple of questions; first of all, could you just update us on; I know you said you were working on some international partnerships for ZENPEP I guess in Europe and then Asia. Could you just update us on where those are going and then the revenue recognition part of it, could you just let us know; on the royalty side, do you see those in arrears or do you get them to get us to sales made by Cephalon and then for your new pancreatic enzyme product. Also do you recognize revenue when they shift or just based on the prescription to PANCRELIPASE?

Gearoid Faherty

Okay David, I’ll take the question on the out licensing of ZENPEP and then I’ll pass it over to Mario for your other two questions.

As you know, we are in active discussions with a range of different partners, both here in Europe and in Asia for the out licensing of ZENPEP and not much of an update to give you, discussions are going along as per plan, maybe a little bit slower than we would have expected, because we’re dealing with the number of different partners at the same time, working to get the best possible deal for Eurand.

So, I think you’ll be getting updates from us reasonably soon about the stages of these things, but no major evolution for now. Discussions are ongoing, both in Europe and in Asia and we feel pretty confident, we’ll have deal soon.

Mario Crovetto

David, Mario speaking. Your first question was how we recognized AMRIX royalties? They are based on net sales of Cephalon, by Cephalon of AMRIX. So we recognize this revenue in a way as Cephalon does recognize their revenue.

The second question was about PANCRELIPASE, our PEP. Even that, in the first quarter there was a very significant increase in shipments of this product to our trade. We are recognizing revenues not entirely based on shipments to the trade, but we recognize revenues looking at scripts and reasonable inventory levels in the trade.

David Steinberg - Deutsche Bank

Okay and just on the royalties Mario, they should line up exactly than with what Cephalon reports in the quarter or are they reported the quarter after, is what I was trying to get at?

Mario Crovetto

We recognize royalties based on a report on net sales, which is received from Cephalon, our concept is that.

Gearoid Faherty

So, at the end of the quarter, David Cephalon reports the sales that they’ve had for the quarter to us and on the basis of that the royalty is calculated and paid.

Mario Crovetto

This is on net sales, by Cephalon.

David Steinberg - Deutsche Bank

Okay and then just lastly, can you discuss some of the pre market activities you’re conducting if any in pancreatic enzyme markets, since you are not actively detailing, but can you talk about some of the things your sales and marketing force are doing, before the approval with the…?

Gearoid Faherty

I can’t really David, because obviously this is an open forum and anybody can be listening into this call, our competitors included. So, we’re not prepared right now to tell people what we’re doing, but as you know, we’ve had large parts of our sales and marketing team and contracting team in place for over nine months now and obviously, these people have being doing a lot of work to prepare for the launch.

David Steinberg - Deutsche Bank

Okay, thanks.

Operator

Thank you. Our next question is coming from Erin Michelle [Ph] and (Operator Instructions).

Unidentified Participant

Hi, guys. I apologize that I missed the very beginning of the call, so I apologize if you’ve already addressed any of these questions, but on the market dynamics in the PEP market, do you believe that all the PEPs that have not filed NDA stopped shipping as of the end of the April and did the FDA take any actions to enforce the mandate and also how many months of inventory do you guys believe is left in the channel?

Gearoid Faherty

That’s a lot of questions. The DFA guideline for NDA submission is of the 28 April, so it’s about a weak and a half ago now. So, it’s far too early to say whether certain people who may not have filed have left the market; and typically if we look at what happen with Pangestamine [Ph] and KV, from when they stop to ship, which was at the end of January to today, we’re still seeing KV product in the market.

So that would lead us to believe that at least in the KV example that there’s about three months of product in the market posed stopping shipment. Obviously we can’t infer that that’s the case for other suppliers; that maybe more or it maybe less, but it’s a rule of thumb as to what’s going on. I think there was a third part to your question, can you remind me what it was?

Unidentified Participant

If the FDA took any actions to enforce their mandate?

Gearoid Faherty

Too early to call

Unidentified Participant

Okay and then to follow-up on those; do you know the status of Johnson & Johnson? Do you know if they filed in NDA?

Gearoid Faherty

We don’t know yet.

Unidentified Participant

Okay and then on Axcan’s new PEP formulation, I just want to confirm that you will continue to supply that and also are there going to be any material changes to the royalty rate or impact on your revenues there for that product line?

Gearoid Faherty

We will continue to supply Axcan and we’re not prepared to talk about commercial term.

Unidentified Participant

Okay. Alright, thank you.

Operator

Thank you. (Operator Instructions) Our next question is coming from Frank Pinkerton from SunTrust Bank.

Frank Pinkerton - SunTrust Bank

HI, thanks. Gearoid first of all, can you just remind me with your AMRIX deal with Cephalon, especially considering the upcoming launch for that company with new vigil. Are there any minimum number of reps or other marketing kind of focus they need to keep on AMRIX and do you know in your conversations with them, is they’re going to be less of a focus there once that new individual products launches that a pretty big product for them?

Gearoid Faherty

We’re not aware of any decision that they’ve taken to reduce the forces behind AMRIX. On the contrary Frank, as we’ve seen and in the announcements we’ve made, they have taken it from by 450 people selling the product up to 840 and that’s happened just in the last quarter.

I think when you listening in to both Camboochi [Ph] and Frank on their recent call, you see a lot of enthusiasm for the product, you see a lot of commitment from the product and I think on the last call, Frank actually said it was one of the near term drivers for their business. So, I don’t think there is any reason to think that their plans are likely to change.

With regard to the contract terms with us, we don’t disclose contract terms. We doing do with a lot of different pharma companies and we don’t disclose the terms, by which we deal with people, because obviously that becomes knowledge for other people that we would like to deal with in the future.

Frank Pinkerton - SunTrust Bank

Okay, great. Then on the 1048, I know that product has been taking a little longer I guess to get to market and get out unexpected, but just if that product or TSK decides not to take that product forward, is there any, say onetime payments, R&D type things that would come back to Eurand or does that product ultimately bond to GSK or Eurand and what could be the fate there if GSK does not decided to take it forward?

Gearoid Faherty

In the United Sates the product belongs to GSK as we’ve disclosed in the past. We’ve also disclosed in the past that we have certain rights or shared rights outside the Untied States in relation to this particular product, but I think the most important to answer to your question Frank is, no, we don’t see any change in GSK’s commitment. We see them working very actively with the FDA to get this product to the market as quickly as possible. We’ve no reason to think that there’s any change of plan.

With regard to your question about milestones; as we’ve disclosed in the past, there are two different types of milestones that we get in this particular deal. We get reg milestones as the product moves through the regulatory process and we get sales milestones as the product reaches sales target.

Frank Pinkerton - SunTrust Bank

Great, thank you.

Operator

Thank you. Our next question is a follow-up from David Steinberg from Deutsche Bank.

David Steinberg - Deutsche Bank

Thanks. Yes, just a quick question on the market size. It looks like the last couple of months, since KV exited the market, the dollar value of the U.S. PEP market has increase pretty significant and it looks like around $350 million. Once all those low priced products are out of the market, what’s your view of the size of the market and there’s some speculation that there will be some fairly significant price increases by most of the players, could you comment on that? Then finally, an update on what the size of the European and Asian PEP markets are right now?

Gearoid Faherty

Good question David. I think if we look back about a year or two, the U.S. market has gone from of about $220 million a year, to last year, I think end of 2008 it was about US$313 million. We’ve seen many of the branded players push through very significant price increases in the last 12 months and I have no reason to think that that’s going to change.

We also disclosed in the call today that obviously pangestamine it’s peak at I think around 36 [Technical Difficulty] put a price increase on top of that, of the order of some of the price increase we’ve seen. I mean price increases in this market over the last 12 months have been as highest as 17% with certain players.

So, I think the market should certainly be on exit of the low cost products, much higher than $400 million. The world market at the moment is about $1 billion and in Europe the market has worth about $400 million, $450 million.

David Steinberg - Deutsche Bank

Great, thank you.

Operator

Thank you. At this time, we have no further questions. I would like to turn the call back over to Mr. Faherty for any closing comments.

Gearoid Faherty

Thank you everybody for your attention and time this morning. I appreciate the fact that you joined the call and we look forward to talking to you again at the end of the second quarter. Thank you.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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